A Fool’s Game

The head of the U.S. Chamber of Commerce said that earnings projections are a “fool’s game” and ought to be stopped.

“Earnings projections are a fool’s game for management,” Donohue said at a conference organized by the Wall Street Analyst forum. “Companies want to project numbers that will please Wall Street, their shareholders, and all of the bloggers and talking heads on cable TV.
“All company executives, especially those of large public companies, should follow the lead of others who have stopped issuing earnings guidance. Short of that, companies should never offer a single figure instead of a wide range.”

I agree it’s a fool’s game, but that’s not a good reason to stop. Hell, they still televise Wheel of Fortune.
The problem is this punishes business for the sins of investors: “Please stop them, before they make me do it again!” Why don’t we open the markets one day a quarter? Honestly, that would probably be to the benefit of a lot of investors.
I agree that dividing the entire world into three-month blocks of time isn’t the best thing for business. The problem is that by taking it away, investors will start to focus on some other performance metric. Probably a dumb one, like price. The answer isn’t less information, but more. In fact, I’d like to see monthly sales reports from companies. This is counterintuitive, but I think more frequent financial info would cause investors to focus on the long term. Once you see the warts, you’ll start to look at the big picture.
Donohue also criticized Regulation FD.

He also said the Securities and Exchange Commission should reconsider the rule, known as Reg FD, that requires that companies provide all significant financial information to the entire investing public at the same time.
“Reg FD, while a well-intentioned attempt to level the playing field of information, has ended up chilling corporate speech,” he said. “Faced with the SEC’s hyper-enforcement regimes, corporate lawyers advise their management to say as little as possible about what is happening at the company.”

Once again, he’s confusing who’s causing the problems. Reg FD hasn’t “chilled” corporate speech—it has chilled intra-corporate speech. Companies with nothing to hide, still have nothing to hide. Does anyone really think Expeditors cares what some 26-year-old analyst thinks? Not letting companies whisper to their buddies won’t suddenly lead them to tell the public more.
As always, the answer is more information.

Posted by on December 1st, 2005 at 3:02 pm


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